Financial Reporting · Ind AS 40 Investment Property

Ind AS 40 Scope and Definition of Investment Property

Updated 5 October 2026 · Fact-checked

Investment property is land or a building (or part of one), or both, held by the owner or a lessee to earn rentals or for capital appreciation, or both. It is not held for own use, for supply of goods or services, for administration, or for sale in the ordinary course. To solve a question, identify the purpose for which the property is held and then apply the exclusions.

Understand Ind AS 40 Scope and Definition of Investment Property

Ind AS 40 deals with property held as an investment. The key idea is that such a property earns cash flows largely independent of the other assets of the entity. A factory produces goods using the building together with machinery, labour and other inputs. A building let out to a tenant earns rent on its own. That is why the standard treats it separately from Ind AS 16.

The definition has two parts. First, the item must be land, a building, part of a building, or both. Second, it must be held to earn rentals, for capital appreciation, or both. The holder can be the owner, or a lessee who holds the property under a right-of-use arrangement.

The exclusions come from the purpose of holding. Owner-occupied property is held for use in production or supply of goods or services, or for administrative purposes. It falls under Ind AS 16. Property held for sale in the ordinary course of business, or being constructed or developed for such sale, is inventory under Ind AS 2. Property being constructed or developed on behalf of third parties is dealt with under Ind AS 115, not Ind AS 40.

A property that is investment property and is to be disposed of stays under Ind AS 40 until it meets the criteria to be classified as held for sale under Ind AS 105. At that point it moves to Ind AS 105.

A property being redeveloped for continued future use as investment property also stays under Ind AS 40. You do not reclassify it to inventory during the redevelopment.

Mixed-use property needs a split. If the portions could be sold or leased out separately under a finance lease, you account for each portion separately. If they cannot, the property is investment property only if an insignificant portion is held for own use. Ancillary services are another test. If the owner provides only insignificant services to occupants, such as security or maintenance, the property is still investment property. If the services are significant, as in an owner-managed hotel, the property is owner-occupied.

Examples that qualify: land held for long-term capital appreciation, land held for a currently undetermined future use, a building owned and leased out under operating leases, and a vacant building held to be leased out. Examples that do not qualify: property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees (whether or not the employees pay rent at market rates), and property that the entity as lessor has leased to another entity under a finance lease. The lessor derecognises that property and recognises a lease receivable. This exclusion applies to the lessor only. A lessee that holds a leased property can classify it as investment property if it meets the definition.

Key rules to remember

Definition of investment property: Land / building / part of building / both + held to earn rentals or for capital appreciation or both; Held by the owner or by a lessee under a right-of-use arrangement. A lessee can classify a leased property as investment property if it meets the definition. Purpose of holding decides the classification.
Owner-occupied property: Held for production or supply of goods or services, or for administrative purposes → Ind AS 16; Includes property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, and property occupied by employees.
Property held for sale: Held for sale in the ordinary course of business, or under construction or development for such sale → Ind AS 2; Typical for real estate developers. An investment property to be disposed of stays under Ind AS 40 until it meets the held-for-sale criteria of Ind AS 105, when it moves to Ind AS 105. A property being redeveloped for continued future use as investment property stays under Ind AS 40 and is not moved to inventory. Property constructed on behalf of third parties is dealt with under Ind AS 115.
Mixed-use property: Portions separately saleable (or leasable under a finance lease) → account separately; otherwise investment property only if the own-use portion is insignificant; Apply the test on the facts of the property, portion by portion.
Ancillary services test: Insignificant services to occupants → investment property; significant services → owner-occupied; Judgement is needed. The test is whether the services provided are insignificant or a significant component of the arrangement as a whole.
Group property rule: Property leased to a parent, subsidiary or fellow subsidiary → investment property in the owner's separate financial statements, provided it meets the definition of investment property in the owner's separate financial statements; owner-occupied in the consolidated financial statements; The group as a whole uses the property for its own purposes.

How to solve Ind AS 40 Scope and Definition of Investment Property questions

Use the same sequence for any scope or classification question on Ind AS 40. Write the purpose first, then the standard.

1Identify the asset: is it land, a building, part of a building, or both? If it is plant, a vehicle or another asset, Ind AS 40 does not apply.
2State the purpose for which the entity holds it: rentals, capital appreciation, own use, or sale in the ordinary course.
3Check the exclusions: own use points to Ind AS 16, sale in the ordinary course points to Ind AS 2, construction on behalf of third parties points to Ind AS 115, and a finance lease granted to a lessee points to an Ind AS 116 lease receivable. An investment property that meets the held-for-sale criteria moves to Ind AS 105.
4If the property has mixed use, ask whether the portions can be sold or leased out separately. If yes, split. If no, check whether the own-use portion is insignificant.
5Test ancillary services: are the services provided to occupants insignificant or significant relative to the arrangement as a whole?
6Check whether the holder is a group entity and whether the question asks about separate or consolidated financial statements.
7Write the conclusion in provision-fact-conclusion form and name the Ind AS that applies.

Quickest way: Purpose-first classification

When to use it: Use this in MCQs and short case scenarios where you must classify a property in under a minute.

Ask: why is the entity holding it? Pick one of four: rent, appreciation, own use, sale.
Rent or appreciation: Ind AS 40. Own use: Ind AS 16. Sale in the ordinary course: Ind AS 2.
Scan the facts for traps: mixed use, significant services, lease to a group company, or a finance lease granted.
If a trap is present, apply its specific rule. Otherwise, conclude straight away.

Common mistakes in Ind AS 40 Scope and Definition of Investment Property

Treating land held for an undetermined future use as owner-occupied or inventory.
Students assume that no stated purpose means no investment purpose.
Fix: Land held for a currently undetermined future use is deemed held for capital appreciation, so it is investment property.
Classifying property leased to a parent, subsidiary or fellow subsidiary as investment property in the consolidated statements.
Students look only at the rental and ignore the group view.
Fix: For property leased to a parent, subsidiary or fellow subsidiary, the group uses the property for its own purposes. In the consolidated financial statements it is owner-occupied under Ind AS 16. In the owner's separate financial statements it is investment property, provided it meets the definition.
Applying Ind AS 40 to a hotel the owner manages.
The building earns revenue from guests, so it looks like an investment.
Fix: Where the owner provides significant services to guests, the property is owner-occupied. Apply Ind AS 16.
Treating property held by a real estate developer for sale as investment property.
Students focus on the asset being a building and ignore the business model.
Fix: Property held for sale in the ordinary course, or under development for such sale, is inventory under Ind AS 2.
Ignoring the split rule for mixed-use buildings.
Students want one classification for the whole building.
Fix: If portions can be sold or leased out separately under a finance lease, classify each portion separately. If not, apply the insignificant own-use test.
Treating a property under a finance lease granted to a lessee as investment property of the lessor, or assuming a lessee can never hold a leased property as investment property.
The lessor still legally owns the property, and students apply the lessor's exclusion to every party to the lease.
Fix: Under a finance lease, the lessor derecognises the asset and recognises a lease receivable under Ind AS 116, so the lessor does not treat it as investment property. The exclusion applies to the lessor only. A lessee can classify the leased property as investment property if it meets the definition.

Worked examples

Example 1

Skyline Ltd owns a five-storey building. All five floors are of equal area. It uses floors 1 and 2 for its own head office. Floors 3 to 5 are let out to unrelated tenants under operating leases. The floors cannot be sold separately, and none can be leased out under a finance lease. Skyline provides only security and common-area maintenance to tenants. How should Skyline classify the building?

Show the solution

Identify: the asset is a building, so Ind AS 40 may apply.
Purpose: floors 1 and 2 are held for administrative use. Floors 3 to 5 are held to earn rentals.
Mixed use: the floors cannot be sold or leased out separately under a finance lease, so no split is allowed.
Own-use portion: the floors are of equal area, so floors 1 and 2 are 2 ÷ 5 = 40% of the building. Ind AS 40 gives no numeric threshold for 'insignificant', so you judge it on the facts. On these facts, 40% own use is a significant portion and not an insignificant one.
Services: security and maintenance are insignificant ancillary services, so they do not change the classification.

Answer: The own-use portion (40% of the building by area) is judged significant on these facts and the portions cannot be separated, so the whole building is not investment property. Skyline treats the whole building as property, plant and equipment under Ind AS 16.

Example 2

Greenfield Developers Ltd constructs residential apartments for sale to customers. Block A is unsold and is being let out to tenants temporarily. Separately, the company holds a plot of land bought three years ago and has not decided whether to build on it, sell it or lease it out. How should each be classified?

Show the solution

Block A: the apartments were constructed for sale in the ordinary course of business. Temporary letting does not change the purpose of holding.
Block A conclusion: it remains inventory under Ind AS 2.
Plot of land: it is not held for use in the business or for sale in the ordinary course. Its future use is undetermined.
Under Ind AS 40, land held for a currently undetermined future use is regarded as held for capital appreciation.

Answer: Block A is inventory under Ind AS 2. The plot of land is investment property under Ind AS 40.

Exam tips

In case-scenario MCQs, find the sentence that states the purpose of holding. It almost always decides the answer.
Watch for distractor words such as 'temporarily let out' or 'insignificant services'. Each one points to a specific rule.
In written answers, name the exclusion and the Ind AS it points to: Ind AS 16 for own use, Ind AS 2 for sale in the ordinary course.
Check whether the question asks for separate or consolidated financial statements before classifying a property leased within a group.
Always give a one-line reason for your conclusion, because marks are linked to the reasoning.

Practice questions from Ind AS 40 Investment Property

Ind AS 40 Scope and Definition of Investment Property in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ind AS 40 Scope and Definition of Investment Property: frequently asked questions

What is investment property under Ind AS 40?

It is land or a building, or part of a building, or both, held by the owner or a lessee to earn rentals or for capital appreciation, or both. It is not held for own use or for sale in the ordinary course of business.

What is the difference between investment property and owner-occupied property?

Investment property generates cash flows largely independent of the entity's other assets. Owner-occupied property is used in producing or supplying goods or services or for administration, so its value is tied to the entity's operations. Owner-occupied property is covered by Ind AS 16.

Is property held for sale covered by Ind AS 40?

No. Property held for sale in the ordinary course of business, or under construction or development for such sale, is inventory under Ind AS 2. Ind AS 40 applies only if the property is held for rentals or capital appreciation.

How is a property partly used by the owner and partly let out classified?

If the portions can be sold or leased out separately under a finance lease, you account for them separately. If not, the property is investment property only when the own-use portion is insignificant.